Visionary CEOs seduce media, but investors (usually) prefer Vulcans

Mark Zuckerberg, founder and CEO, shows off the new messaging system in Facebook.

The Popular Ideal of the Visionary CEO

Especially here in Silicon Valley, we are attracted to the notion of the visionary CEO, a motivated, impassioned leader who is driven to change the world, and who has created and led a business to pursue this monumental ideal. Think of Sergey Brin and Larry Page seeking to organize all the world’s information, Mark Zuckerberg’s hope to connect the world , Jeff Bezos’s dream of a customer-friendly online marketplace for everything , Steve Jobs’s aspiration to make a dent in the universe, Howard Schultz’s quest for a Third Place, or John Mackey’s goal of “improving the health and well-being of everyone on the planet.”

This view of business is perhaps best captured by Mackey and Sisodia’s recent book, Conscious Capitalism (see here), in which the authors explicitly argue that businesses exist to change the world, and argue that generating profits are (or should be) subordinate — simply the means to achieving a more meaningful end.

At some level, I think most young entrepreneurs resonate with this understanding, and fundamentally are driven to build something that matters. It’s also how VCs appeal to promising entrepreneurs, emphasizing their mission of “partnering with great entrepreneurs to build the next big thing” (KPCB), “helping exceptional entrepreneurs build lasting, category-defining technology companies” (Accel), or “helping talented entrepreneurs build major technology enterprises focused on long-term growth” (Benchmark).

This narrative-focused view of business as a route to self-actualization — business as an impassioned expression of personal vision — is as appealing as it is accessible, and contributes to our national fascination with entrepreneurs and entrepreneurship. Yet, it’s obviously not the whole story.

There’s another view of business that says, as Milton Friedman classically wrote in 1970, “the social responsibility of business is to increase its profits.” The limited partners who stake VCs are almost exclusively concerned with how much return they get for their investment. Most of the shareholders of Amazon, Facebook, Google – same thing: in general, their concern isn’t whether a company is denting the universe, but rather how much money shareholders receive as a consequence.

In this context, we shouldn’t be surprised to learn that, as David Brooks has written, most successful CEOs tend not to be charismatic visionaries, but detail-oriented penny-pinchers who excel at incrementally improving business operations (a contrast I’ve discussed here – my favorite piece).

Thorndike’s The Outsiders

Now, William Thorndike—founder and a managing director at Housatonic Partners – has taken the Brooks observation to the next level with the publication of The Outsiders, an account of eight CEOs with remarkable track records of increasing shareholder value over time. You probably have never heard of most of these CEOs (with the obvious exception of Warren Buffet)—and that’s part of the author’s point.

According to Thorndike, these high-performing CEOs tend to share a set of personal characteristics – they are often legendarily frugal (e.g. painting only 2 sides of a build because those sides could be seen from the street), humble, analytical, and understated. They make few public appearances, and do not exude charisma.

Thorndike’s ultra-successful CEOs favor highly decentralized organizations, and seek to push most operational decisions deep into the operating divisions. This prevents CEOs from “screwing around with operating people,” as General Dynamics CEO Nicholas Chabraja put it. Headquarters tend to be run with skeleton staffs; cable giant TCI, for instance, only had seventeen employees at corporate; as TCI CEO John Malone commented, “We don’t believe in staff. Staff are people who second-guess people.”

Instead, the highly successful CEOs — who tend to think more like investors than managers – choose to spend the bulk of their time focused on capital allocation, which they see as their primary responsibility.

It turns out there are basically just a few ways for CEOs to use capital: invest in existing operations, acquire other businesses, issue dividends, pay down debt, or repurchase stock. (A sixth approach, used to great effect by Malone, is investment in joint ventures) . There are also only a handful of ways to raise capital: use internal cash flow, issue debt, and raise equity. This, in essence, is the CEOs tool kit, and the way they deploy these options, says Thorndike, is what sets the great ones apart.

Thorndike also points out that in contrast to most CEOs, who have spent their entire careers in one industry, and thus are like Isaiah Berlin’s hedgehogs who know a lot about one thing, the most successful CEOs tend to be like Berlin’s foxes, knowing a bit about many different areas, and able to make important connections and see unexpected relationships.

Above all, Thorndike’s superstar CEOs were all obsessively focused on cash flow (not earnings, not company size); they seemed to spend far more time thinking about improving tax efficiency and strengthening margins than they did contemplating their long-term impact on the planet.

What stands out most about these financially-savvy CEOs – at least in Thorndike’s account – is their conspicuous lack of purpose beyond cash-flow maximization, a focus Thorndike applauds – together, I imagine, with most of the investment community, and of course, the spirit of Milton Friedman.

Of these leading CEOs, Thorndike writes,

“As a group, they were, at the core, rational and pragmatic, agnostic and clear-eyed. They did not have ideology. When offered the right price, [General Dynamics CEO Bill] Anders might not have sold his mother, but he didn’t hesitate to sell his favorite business unit.”

Malone, too, earns praise for selling the business he built when the price was right. “Although Malone loved the cable business, he was a purely rational executive” with a “cool, calculating, almost Spock-like approach.”

Visionary vs Vulcan

As tempting as it may be to envision a world dichotomized between visionary CEOs, on the one hand, and Vulcan CEOs, on the other, I suspect most successful visionary CEOs (arguably the only ones who last in that role) are those who figure out how to connect with their inner Vulcan. Successfully running a business requires the ability to keep it functioning and afloat, and to ensure the capital is deployed as wisely as possible. As the astronauts figured out in The Right Stuff, “No bucks, no Buck Rodgers.”

Consider the recent NYT profile of Jeff Bezos, who is described in Amazon’s early days as wrestling whether or not to include professionally-written reviews. While Bezos had originally championed the idea over the objections of the “data-driven MBAs, otherwise known as ‘Vulcans’,” he later changed course, and scuttled the “high-minded” but expensive endeavor. “It was a culture war,” explained a former employee, “and the Vulcans won.”

To be clear, both visionary and Vulcan approaches, as Clay Christensen has pointed out, can involve tremendous innovation (which he terms empowering innovations and efficiency innovations, respectively), and can achieve a measure of good (creating new categories in the first case, “emancipating capital for other uses” in the second).

Curiously, while you need an element of the Vulcan to succeed as a CEO, I’m less sure you need the visionary component, at least in the Mackey “we exist to accomplish this mission” sense. The truth is that most investors, most Wall Street CEOs, and more VCs than you might think, are fundamentally Vulcans – their highest purpose is achieving return on investment, and they strive to achieve this through meticulous optimization.

While most traditional investors recognize that the idea of mission can be a helpful motivational tool for (impressionable?) employees, I suspect many investors also tend to worry — a lot — about CEOs who seem to actually believe it, concerned this might adversely impact just the sort of ultra-rational decision-making Thorndike describes.

It’s also not clear to me how well the Vulcan approach translates to disruptive innovation – which makes placing Vulcan executives in charge of empowering innovation activities potentially problematic. Arguably this accounts for some of pharma’s struggles – but it may also explain how, despite their innovation troubles, pharma has been able to stay in the game.

I’m also aware of large multinationals that seem to be applying the Vulcan approach to improve the efficiency of disruptive innovation development, in part by what I’d call “processifying” their approach to innovation; I’m cautiously pessimistic about how this will turn out.

While I struggle to connect with the pure Vulcan mindset – I can’t imagine showing up at work thinking my highest purpose is to maximize cash flow – I’ve also concluded that in order to be successful in business, you not only need to viscerally understand the Vulcan perspective, you also must be able to call upon it, at times, to inform key organizational decisions.

In contrast to the wild popularity enjoyed by biographies of visionary business leaders like Branson, Schultz, and especially Steve Jobs, The Outsiders, perhaps fittingly, seems to have flown below the radar. This is unfortunate, because it offers such an important insider’s perspective, an unapologetic glimpse into the hard-core investor view of what success looks like.